Coles looks like losing lead over Woolworths as sales growth slows

The key measure of sales performance at supermarket giant Coles has slowed for a fourth straight quarter as competition from rivals Woolworths and Aldi continues to heat up.

The results were seen as being negatively affected by the fact that Easter fell later this year.

In a third quarter update today, Coles owner Wesfarmers (WES) reported food and liquor sales for the three months to March 31 had edged up 1.2 per cent to $7.6 billion.

Among the conglomerate’s other operations, strong growth was booked at Bunnings and Officeworks, the recent expansion at Kmart decelerated and the troubled Target division struggled to show any signs of improvement.

The more closely watched reading on comparable sales growth for the food and liquor arm slowed to just 0.3 per cent for the quarter, as against a Deutsche Bank prediction of 0.5 per cent and the December quarter read of around 1 per cent.

The key measure of sales performance at supermarket giant Coles has slowed for a fourth straight quarter as competition from rivals Woolworths and Aldi continues to heat up.

The results were seen as being negatively affected by the fact that Easter fell later this year.

In a third quarter update today, Coles owner Wesfarmers (WES) reported food and liquor sales for the three months to March 31 had edged up 1.2 per cent to $7.6 billion.

Among the conglomerate’s other operations, strong growth was booked at Bunnings and Officeworks, the recent expansion at Kmart decelerated and the troubled Target division struggled to show any signs of improvement.

The more closely watched reading on comparable sales growth for the food and liquor arm slowed to just 0.3 per cent for the quarter, as against a Deutsche Bank prediction of 0.5 per cent and the December quarter read of around 1 per cent.

However, the group said that after factoring in the impact of the later date for Easter, comparable sales were up a more robust 0.7 per cent.

The Coles sales result for the third quarter marks the slowest growth in food and liquor sales for more than nine years and almost certainly guarantees that it will be beaten by Woolworths when the supermarket giant releases its third quarter performance next week.

If Woolworths can squeeze out a bigger sales growth figure for the quarter, and most analysts expect it will, it will be the second consecutive quarter it has recorded a higher growth rate, but only the second time it has beaten Coles since the fourth quarter of 2009.

For the nine months to March 31, comparable food and liquor sales are up 1 per cent.

“On an Easter adjusted basis, our sales growth in food was broadly in line with the second quarter trend while investment in the customer offer increased during the period,” Coles managing director John Durkan said.

“It is necessary that we continue to proactively invest in the customer offer throughout this period of lower growth and increased competition to ensure we maintain our market leading customer offer.”

The extent of the price wars in the sector has shown up in a reading of 24 straight quarters of price deflation at Coles.

For the March quarter, deflation came in at 0.5 per cent despite a three-year peak in fresh produce inflation.

Its other divisions also endured a mixed quarter, with Officeworks a standout ahead of a likely $1.5 billion IPO later this year.

The retailer logged a 9 per cent lift in sales through the March quarter, boosting its year-to-date turnover growth to 7 per cent.

Unlike Coles, Officeworks was seen as favourably impacted in the quarter by the delayed timing of Easter as against last year. Its operations are slowed at Easter given reduced hours of trade, whereas Coles benefits from significant expenditure on food for the long weekend.

Wesfarmers did not expand on its current plans for a float of Officeworks, leaving it unmentioned in today’s statement.

Elsewhere, the local operations of the group’s home improvement chain Bunnings secured a 7.7 per cent lift in sales for the period, dragging down its year-to-date average slightly to 8.1 per cent.

Comparable store sales rose 6 per cent for the March quarter and are up 6.3 per cent in the fiscal year so far.

Like-for-like sales at the Bunnings UK arm ticked up 2.2 per cent, with the group opening its first Bunnings Warehouse pilot store in the quarter after the acquisition of Homebase last year.

“Our first Bunnings Warehouse pilot stores have been well received by customers, team members, and the community,” the division’s head PJ Davis said.

“The team continues to progress the strategic plan and is focused on building strong foundations.”

The most depressing result was reserved for the department store division that includes Kmart and Target as growth at the former slowed markedly and the decline of the latter showed no signs of slowing.

For the three months to March 31, Kmart sales lifted 2.5 per cent, although on a comparable store basis they dipped 0.3 per cent.

Wesfarmers blamed Easter for the slowdown as comparable sales were seen to have climbed 1.6 per cent after factoring in the shift in the date of Good Friday to the June quarter this year.

It still showed a marked deceleration in growth as year-to-date comparable sales are up 4 per cent.

“Sales were in line with expectations given the later timing of Easter and higher levels of clearance in the prior corresponding period, with more products sold at full price during the quarter,” Kmart managing director Ian Bailey said.

“Inventory quality has remained strong and positions the business well for the remainder of the financial year.”

The dire state of Target appeared to get no better as the group booked a sales decline of 18.1 per cent for the quarter, or 17.9 per cent on a comparable store basis.

Once factoring in the timing of Easter, comparable sales were seen off 16 per cent.

For the year-to-date, comparable sales at the troubled unit are down 18.1 per cent.

“During the quarter, the reset of merchandise disciplines was further progressed and the transition to everyday low prices continued, with higher levels of full price sales and lower levels of clearance activity achieved relative to the prior corresponding period,” department stores boss Guy Russo said.

“Trading momentum is expected to remain challenging in the fourth quarter, but reset merchandise disciplines are expected to support improvements in the quality of sales recorded.”

Macquarie Research said this morning it viewed the Wesfarmers’ third quarter update as a “weak result”, especially from its department store businesses Target and Coles express convenience supermarket stores.

“Wesfarmers’ retail business produced a generally weaker result across the board with some really poor outcomes in the mix, including Convenience and Target.”

This was partly driven by the broader tough retail environment.

“The growth environment is tough currently, and as a result there are only a couple of strong positive comparable growth performances in this result. Hard to see earnings momentum responding positively under such circumstances.”

Macquarie said investors could become impatient with struggling Target after its sales were down 18.1 per cent and comparable store sales declining 17.9 per cent for the third quarter.

“Management note the rebase will continue into the fourth quarter which will test shareholders patience.”

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